Britain’s high street banks could face a full-scale competition probe which could lead to them being split up.

Customers are not getting good value or service from their banks because the lenders weren't competing with each other to provide the best service, the Competition and Markets Authority watchdog said.

Because customers can't easily compare services and deals, and weren't changing banks in big enough numbers, there is little incentive for banks to outperform each other.

Banks also use profits from some products to subsidise others, which distorts the market.

Probe: The high street banks have been given until the autumn to sort out competition issues among themselves or else face a full-scale investigation

The authority said it was considering launching a full-scale market investigation but has given the ‘big four’ banks – Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland – one last chance to come up with a solution before a formal decision in the autumn.

The banks had planned to set up a comparison website, establish new account standards, promote switching and to make it easier for small firms to open accounts as a way of heading off the probe.

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But with customer satisfaction levels at just 60 per cent, the authority was likely to reject the idea.

CMA chief executive Alex Chisholm said that banks are not putting each other under enough pressure to perform.

Mr Chisholm said: ‘There’s not enough rivalry there to be really falling over themselves to serve the customers and come up with new innovations and the best value and the best service they can provide.'

The watchdog has the powers to break up any banks it considers too dominant. State-backed Lloyds and Royal Bank of Scotland are the biggest banks for both personal current accounts and lending to small businesses, and could come under pressure to reduce their market share.

Regulators have been working for some time to increase competition in the banking market, including making it easier for customers to switch bank, improving transparency and making it easier for new banks to enter the market.

But despite these efforts, customers have still not seen enough benefit.

WHAT THE PROBE COULD MEAN FOR CONSUMERS

It would be easier for customers to compare services and deals between banks

Transparency would be improved so customers knew exactly what they were getting and being charged

It would be easier for small businesses to open accounts

Switching
banks would be simpler, meaning more customers may switch banks, which
in turn would force them to provide better deals and services

It would be easier for new banks to enter the market, increasing competition and the level of service being offered

There was 'very little movement' in the market share of the largest banks - other than as a result of mergers and acquisitions - and many customers couldn't tell the difference between the services each offered, the CMA said.

It added that levels of shopping around and switching between banks remained low and that very limited gains had been made by those with the highest levels of customer satisfaction.

This was 'not what would normally be expected in well-functioning, competitive markets', the CMA said.

The announcement follows two studies in collaboration with City watchdog the Financial Conduct Authority (FCA) into the £8 billion personal current account market and the £2 billion SME current account and lending sector.

CMA chief executive Alex Chisholm said: 'Competitive personal and SME banking markets are essential to households and businesses throughout the country, and to the success of the UK economy.

'However, our studies have found that, despite some positive developments, significant competition concerns remain which mean that customers may not be getting consistently good service and value from their banks.

'Our provisional view is that a full market investigation by an independent expert CMA group is necessary to look at this market in detail and identify appropriate measures if competition concerns are found.'

Switching levels: The number of people switching current account has been higher each month of this year compared to 2013

There has been a 16 per cent increase in the number of people switching their current account in the first half of the year compared to 2013, according to a study this week.

In September, the current account switch service was launched by the Payments Council to provide a simple and smooth process in a bid to encourage more people to change their bank, including a seven day promise.

As many as 592,695 have switched their current account in the first six months of the year, compared to 511,139 last year.

Many accounts offer flat rate daily charges for going overdrawn rather than interest. These can look simple and cheap but soon rack up.

Figuring out the actual amount you will be charged for using your authorised overdraft on different accounts can be confusing.

Although the flat-rate fees might seem appealing because of the simplicity, you might actually be better off going for an account that charges you interest instead.

First Direct will charge you £9.80 in interest to go overdrawn by £1,000 for a month on its First Account. But at 50p per day you would rack up charges of £15 on the Flex Direct account from Nationwide BS, and at £1 per day it would be £30 with Halifax's flat-rate fees.

If you were to slip into the red by £150 for a week every month for a year the First Account would charge you no interest - because it has a £250 buffer. But you would pay £54 with a Flex Direct Account and £84 on Halifax's charges.

Some bank overdrafts that charge a flat cash amount for an overdraft can even be more expensive than a payday loan.

But stick within your authorised limit and the traditional bank account overdraft that charges an annual interest rate will be far cheaper.

For example, Nationwide's FlexAccount has an overdraft with an APR of 18.9 per cent - even if you borrowed that £100 for a whole year, you would pay less than £20 in interest.

Consumer watchdog Which? warned that the level of switching is still not the 'avalanche needed to transform the market'.

Mr Chisholm told the BBC Radio 4 Today programme: 'Small businesses say they are not happy with the choices they face and the service they are getting, and in the personal market as well the Big Four banks have satisfaction ratings below 60 per cent.

'Banks are adapting to the changes in the market place in the aftermath of the financial crisis, there's no question about that.

'We say they need to adapt so as to be better focused on their customers and there's no excuse for not doing that.

Solution: Banks have been given until the autumn to fix the problems in the current account, savings and small business lending market

'We're not suggesting collusion. What we are suggesting is that they are not putting each other under enough pressure, there's not enough rivalry there to be really falling over themselves to serve the customers and come up with new innovations and the best value and the best service they can provide.'

Business Secretary Vince Cable welcomed the authorities announcement as he had 'long-standing concerns about the state of competition in UK banking'.

'This is an issue that really matters for the real economy - constraints on banking competition mean less choice for both consumers and small businesses seeking finance to grow.

'This Government has already acted to improve competition, by setting up tough new regulators, establishing the British Business Bank to make the business finance market work better, and making it easier for new players to enter the market.

'But the CMA's initial decision to conduct a full market investigation is a very significant further development, and I very much look forward to their final decision in the autumn.'

British Bankers Association chief executive Anthony Browne said: 'All the banks will co-operate fully with this review and any subsequent investigation. There are substantial changes currently underway across the banking industry to strengthen competition – which improves choice and service for customers. We welcome the fact that the CMA has recognised that there have been a number of recent improvements for customers.

'Banks are pro-competition – they compete for customers every day. Last month we published a series of ideas to help new banks set up and smaller players to grow. We hope these suggestions will be taken up by regulators and politicians.'

David Black of Consumer Intelligence added that banking customers may not be switching regularly simply because they see no reason to.

He said: 'One of the issues that challenges consumers is the difficulty in comparing overdraft costs because of the vast array of differing overdraft tariffs and structures in evidence.

'But it’s worth noting that almost two-thirds of people don’t want to switch because they are happy with their existing account. People need a reason to switch and, barring a seismic change such as free-in-credit banking disappearing, this will typically be driven by either actively seeking a better deal or by dissatisfaction.

'New entrants need to have a really compelling proposition, or target a specific niche, to make a big impact but it’s likely to be a slow burner if they’re starting from scratch.'

Shadow chancellor Ed Balls welcomed the investigation, saying: 'Ministers claim there is no problem to solve, but everyone else recognises that we have a lack of competition in our banking sector,' he said.

'As we said earlier this year, in the next parliament we need to see at least two new challenger banks and a market share test to ensure the market stays competitive for the long term.'

Richard Lloyd, executive director of consumer group Which?, added: 'For too long customers have been getting a raw deal from the biggest high street banks, so a full inquiry into the current account market is welcome if long overdue.

'While there have been encouraging signs of change from some banks, we need to see a revolution in customer service and much better, easily comparable products if more people are to be convinced that it's worth switching accounts.

'The CMA must now get to the bottom of why this market is not working for consumers, but the banks should not waste any time in making changes to put the interests of their customers first.'